1、Using Financial Modeling Techniques to Value and Structure Mergers & Acquisitions,Tact is for people not witty enough to be sarcastic. -Anonymous,Learning Objectives,Primary learning objective: Provide students with a basic understanding of how to use financial models to value and structure M andHow
2、 to use models to estimate the purchase price range, initial offer price (and other key deal characteristics)1 for a target firm, and to evaluate the feasibility of financing the proposed offer price.,1Other key deal characteristics include form of payment, form of acquisition, and tax consideration
3、s.,Financial Models Help Answer Key Valuation, Financing, and Deal Structuring Questions,ValuationHow much is the target company worth without the effects of synergy?What is the value of expected synergy?What is the maximum price the acquirer should pay for the target firm?FinancingCan the proposed
4、purchase price be financed?What combination of potential sources of funds, both internally generated and external sources, provides the lowest cost of funds for the acquirer, subject to existing loan covenants?Deal StructuringWhat is the impact on the acquirers financial performance if the deal is s
5、tructured as a taxable rather than a nontaxable transaction?What is the impact on financial performance and valuation if the acquirer is willing to assume certain target liabilities?,M&A Model Building Process,Step 1: Value acquirer and target as standalone firmsStep 2: Value acquirer and target fir
6、ms including synergyStep 3: Determine initial offer price for target firmStep 4: Determine the combined firms ability to finance the transaction,Step 1: Value Acquirer & Target as Standalone Firms,Use the 5-forces model to understand determinants of profits and cash flow, i.e., bargaining strength o
7、f Customers (size, number, price sensitivity)Current competitors (market share, differentiation)Potential entrants (entry barriers, relative costs)Substitutes (availability, prices, switching costs)Suppliers, incl. labor, lenders, etc. (size, number, uniqueness)relative to industry participants.Norm
8、alize 3-5 years of historical financial informationProject normalized cash flow based on expected market growth and changes in profits/cash flow determinants.,Applying the 5-Forces Model to Project Acquirer and Target Firm Financial Performance,How have the following factors affected revenue growth
9、and profit margins in the acquirer and target firms industry historically?Customers (size, number, price sensitivity)Current competitors (market share, differentiation)Potential entrants (entry barriers, relative costs)Substitutes (availability, prices, switching costs)Suppliers (size, number, uniqu
10、eness),How will these factors change (if at all) to impact future revenue growth and profit margins of these firms?Customers (size, number, price sensitivity)Current competitors (market share, differentiation)Potential entrants (entry barriers, relative costs)Substitutes (availability, prices, switc
11、hing costs)Suppliers (size, number, uniqueness),Key questions: How might changes in the bargaining power of customers and suppliers relative to the acquirer and target firms impact product pricing, costs, and profit margins?How might substitutes and new entrants affect product pricing and profit mar
12、gins?,Step 2: Value Acquirer & Target Firms Including Synergy,Estimate Sources and destroyers of valueImplementation costs incurred to realize synergyConsolidate acquirer and target projected financials including the effects of synergyEstimate net synergy (consolidated firms less values of target an
13、d acquirer),Under what circumstances would the acquisition make sense?,Adjusting Combined Acquirer/Target Company Projections For Estimated Synergy,1Combined company net sales projected to grow 10% annually during forecast period.2Cost of sales before synergy assumed to be 80% of net sales during fo
14、recast period.,Discussion Questions,1. How would you adjust the combined firms income statement for cost savings due to improved worker productivity? (Hint: Determine the line item most directly affected by the improvement in productivity.)How would you adjust the combined firms income statement for
15、 additional revenue generated from cross-selling (i.e., Acquirer selling its products to the targets customers and vice versa)?How would you reflect the expenses incurred in implementing the worker productivity improvement and cross-selling programs on the combined firms income statement?,Step 3: De
16、termine Initial Offer Price for Target Firm,Estimate minimum and maximum purchase price rangeDetermine amount of synergy willing to share with target shareholdersDetermine appropriate composition of offer price,Calculating Initial Offer Price (PVIOP),PVMIN = PVT or PVMV, whichever is greater for a s
17、tock purchase (liquidation value of net acquired assets for an asset purchase)PVMAX = PVMIN + PVNS, where PVNS = PVSOV PVDOVPVIOP = PVMIN + PVNS, where 0 1 Offer price range = (PVT or MVT) PVIOP (PVT or MVT) + PVNSWhere PVMIN = PV minimum purchase price PVT = PV standalone value of target firm PVMV
18、= Market value target firm PVMAX = PV maximum purchase price PVNS = PV of net synergy PVSOV = PV of sources of value PVDOV = PV of destroyers of value = Portion of net synergy shared with target company shareholders Offer price per share = PVIOP / Targets fully diluted shares outstanding1How is “” d
19、etermined? 1Fully diluted shares outstanding includes basic shares plus shares resulting from exercising “in the money” options and conversion of convertible debt and preferred stock.,Calculating Initial Offer Price-Example,A potential bidder estimates the following information for a target firm: PV
20、MIN $650 million (i.e., standalone value) PVNS 50 million PVMAX $700 million = 30% Therefore, PVIOP = $650 million + .3 x $50 million = $665 millionOffer Price Range = $650 million $665 million Options CalculationsSelect Automatic and IterationSet maximum number of iterations to 100 and the maximum
21、amount of change to .01.,Cash & Investments x Interest Rate Affects Net Income,Net income Affects Cash & Investments,Things to Remember,Financial modeling facilitates the process of valuation, deal structuring, and selection of the appropriate financing plan.The process entails the following four st
22、eps:Valuing the acquirer and target firms as standalone businesses using multiple valuation methodsValuing consolidated acquirer and target firms including the effects of net synergyDetermining the initial offer price for the target firm from within the price range defined by the minimum and maximum purchase pricesDetermining the combined firms ability to finance initial offer price,